Gold Traders Bullish a Third Week on U.S. Stalemate: Commodities

By Nicholas Larkin -
Oct 4, 2013

Gold analysts are bullish for a third consecutive week on speculation that the first U.S. government shutdown in 17 years and a standoff over raising the country’s debt limit will spur demand for the metal as a haven.

Eighteen analysts surveyed by Bloomberg expect prices to rise next week, eight are bearish and four neutral. That’s the longest positive run since July. Bullion capped a 7.6 percent gain last quarter, the first in a year, as the U.S. Federal Reserve unexpectedly refrained from tapering its $85 billion-a-month bond-purchase program.

Gold, heading for its first annual drop in 13 years after some investors lost faith in the metal as a store of value, rose as much as 3 percent during the three-week U.S. shutdown that began in December 1995. The Bloomberg U.S. Dollar Index neared a seven-month low on concern the stalemate may weaken economic growth and postpone the tapering of stimulus. Bullion rose 70 percent from December 2008 to June 2011 as the Fed pumped more than $2 trillion into the financial system.

“You’ve got to think that the shutdown is going to be negative for the dollar and positive for gold,” said Ross Norman, chief executive officer of Sharps Pixley Ltd., a brokerage handling physical bullion in London. “The U.S. is trying to haul us out of a ditch, and if that main engine of growth falters, we could be back to a stormy global economy.”

Below Record

The metal fell 21 percent to $1,318.19 an ounce in London this year. It’s trading 31 percent below the record of $1,921.15 set in September 2011. The Standard & Poor’s GSCI gauge of 24 commodities dropped 1.3 percent this year and the MSCI All-Country World Index of equities gained 13 percent. The Bloomberg U.S. Treasury Bond Index lost 2.4 percent.

U.S. President Barack Obama and congressional leaders failed to break a budget impasse in negotiations since the government began the partial shutdown Oct. 1. The standoff raises concern the budget dispute may affect talks to increase the $16.7 trillion debt ceiling by Oct. 17 to avoid a default.

The cost of insuring against losses on Treasuries almost doubled in the past two weeks, with credit-default swaps linked to U.S. government debt reaching 43.6 basis points yesterday, the highest since March, according to data compiled by Bloomberg. A partial shutdown lasting a week would probably cut 0.1 percentage point from economic growth, according to the median estimate of economists in a Bloomberg survey.

U.S. Stimulus

The Fed said Sept. 18 it would maintain bond buying, surprising analysts who predicted a $5 billion reduction in purchases. Economists surveyed by Bloomberg Sept. 18-19 expect the first step in cutting bond buying in December. A government shutdown increases the risk that fiscal problems will prevent a substantial and sustainable job recovery, said Brian Daingerfield, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit.

Gold will drop into next year because economic growth will spur the U.S. central bank to tighten monetary policy, according to Goldman Sachs Group Inc., which forecasts $1,050 at the end of next year. Credit Suisse Group AG sees the metal averaging $1,180 in 2014.

Investors sold 708.4 metric tons from gold-backed exchange-traded products this year, erasing $60.5 billion from the value of the funds and pushing holdings to a three-year low. John Paulson, the billionaire hedge fund manager and biggest investor in the SPDR Gold Trust, the largest gold ETP, cut his stake in the product by 53 percent in the second quarter, a government filing showed.

Global Equities

Global equities are trading 2.4 percent below a five-year high set Sept. 19 on optimism stimulus from central banks around the world will strengthen the recovery. World economic expansion will increase to 3.8 percent in 2014, from 3.1 percent this year, according to the International Monetary Fund.

Hedge funds and other large speculators increased bets on gains in gold by 12 percent in the week ended Sept. 24, the most in a month, to 78,654 contracts, U.S. Commodity Futures Trading Commission data show. That pared this year’s drop in net-long positions to 23 percent.

Eight of 16 people surveyed expect raw sugar to fall next week and six were bullish. The commodity slid 5.4 percent to 18.45 cents a pound on ICE Futures U.S. in New York this year.

Eight of 18 people surveyed anticipate lower corn prices and five said the grain will rise, while eight of 18 said soybeans will drop and seven expect higher prices. Eight predicted gains in wheat and four were bearish. Corn fell 37 percent to $4.395 a bushel this year in Chicago. Soybeans dropped 9 percent to $12.8275 a bushel, as wheat slid 12 percent to $6.88 a bushel.

Metal Exchange

Six traders and analysts surveyed expect copper to rise next week, three were bearish and eight neutral. The metal for delivery in three months, the London Metal Exchange’s benchmark contract, dropped 8.4 percent to $7,265.25 a ton this year.

While improving demand will spur most industrial commodities to rally “a little further’ into the fourth quarter, gains will probably be modest, Credit Suisse said in a report yesterday. Growth in China, the biggest user of everything from copper to coal, slowed in the first two quarters of this year. A services-industry index in the country rose to a six-month high in September, data showed yesterday.

‘‘People genuinely believe there’s an economic recovery going on,” said Carole Ferguson, an analyst at SP Angel Corporate Finance LLP, a broker and adviser in London. “Industrial commodities aren’t going to sell off much from here. Chinese data had been picking up, so people were getting a bit more comfortable.”